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Public debt in France has hit 114% of GDP
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The situation in France shows you do not need to default to lose control
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If Reeves refuses to change course, she will discover – as France has now – the brutality of the markets
Across the Channel, France is staring down a full-blown fiscal crisis. Public debt has hit 114% of GDP, with the IMF expecting it to rise beyond 116% in the months ahead. The deficit is on track for 5.4% this year. Investors have finally lost patience with the French state’s long-standing habit of spending like Louis XIV – lavishly and without restraint – while reforming like Louis XVI, reluctantly and far too late. The consequences are plain. Ten-year borrowing costs have risen to 3.5%, the spread over German Bunds is at its widest in a decade, and the CAC 40 – France’s benchmark stock index – has shed more than 3% in just three days, dragged down by the banks.
François Bayrou, the embattled prime minister, has wagered his government’s survival on a €44 billion austerity package. This is not reform but repentance – a desperate attempt to convince investors that Paris still holds the reins. He has bound it to a confidence vote on September 8, but the real judgement is already being delivered in the bond markets. French officials now speak of the unthinkable: that France, a founding member of the eurozone, could one day be forced to turn to the IMF.
This is a sovereign debt crisis playing out, in real time, in a G7 economy. Britain should be alarmed.
On paper, things here look only marginally healthier. Our debt stands at 96% of GDP, with the IMF projecting 104% within a few years. The deficit is running at 5.3%. These figures are uncomfortably close to those of France. Britain has not posted a budget surplus since 2000–01; since 1970-71 it has averaged an annual deficit of 3.7% of GDP – more than half a century of living beyond its means. For years, ultra-low interest rates disguised the cost. With gilt yields now at 4–5%, and the 30-year approaching 6%, that illusion has gone.
Three of Britain’s most respected economists – Jagjit Chadha, Andrew Sentance and Willem Buiter – have already warned that Rachel Reeves could face her own ‘1976 moment.’ Back then, Denis Healey, the Labour chancellor, tieless and weary, was forced to turn back at Heathrow to summon the IMF as sterling collapsed – an image that came to symbolise Britain’s loss of control over its economic fate.
The analogy is powerful but imperfect. In 1976, Sterling was overvalued and constrained by exchange controls, leaving it acutely vulnerable to chronic balance of payments deficits. Investors dumped pounds, driving the currency to record lows against the dollar. Reserves dwindled. The government was running out of options – and indeed, of dollars.
Today, the risks are different. Sterling floats freely, and the Bank of England can always create the pounds needed to service its own debt. In the strict sense, Britain cannot go bankrupt. The danger now is not insolvency but sustainability.
The situation in France shows you do not need to default to lose control. For years, Paris assumed markets would tolerate its deficits. They did – until they didn’t. Bayrou is now learning how quickly the illusion of control evaporates once investors lose faith, a vulnerability made sharper by his minority government.
We have seen this before. During the eurozone sovereign-debt crisis of 2010-2015, Greece, Portugal, Ireland and Cyprus were all forced into humiliating bailouts overseen by the IMF, ECB and EU (the infamous ‘Troika’). Spain and Italy only narrowly avoided the same fate, not through reform, but because the ECB promised to do ‘whatever it takes’. Governments fell, budgets were rewritten in Brussels, and national sovereignty vanished almost overnight.
Britain was spared only because it borrowed in its own currency – a stroke of fortune that has since bred a dangerous complacency.
Fast-forward to today and the warning signs are unmistakable. Deficits are treated as routine. Debt ratios rise remorselessly. Ministers talk of ‘discipline’ as if words alone could steady the markets. They cannot.
Which brings us to Rachel Reeves. The chancellor talks endlessly of ’iron discipline’ and ‘stability’. Yet her most striking move has been to elevate Torsten Bell – a man whose career has been devoted to advocating higher taxes and a bigger state – into her inner circle. To investors, this signals not reform but resignation: the expectation that Britain will dodge the hard choices of structural change and instead lean on redistribution, conveniently repackaged as responsibility.
That, make no mistake, is Reeves’s plan for the Autumn Budget. With no fiscal headroom, taxes will rise. Bell will provide the glossy charts to frame them as ’progressive’ and ‘responsible.’ This may soothe those on the ‘left’ of Labour. It will not reassure the bondholders who finance Britain’s debt.
Markets do not price fairness. They price credibility and risk. If they conclude the Treasury is trading reform for redistribution, they will simply demand a higher return. With debt already near 100% of GDP, the arithmetic is unforgiving. Every notch higher in yields diverts billions from schools and hospitals into the pockets of bondholders. Redistribution, yes – but not the kind Reeves imagines.
France is already living this nightmare: drift indulged for years, then suddenly punished. A government pushed into austerity, not by choice but by necessity. Bayrou’s confidence vote may matter in Paris, but the real judgement is delivered daily in borrowing costs.
Britain risks the same fate. Our institutions may differ, but the principle does not. Once credibility is lost, sovereignty follows. The Government can win every Commons vote and still find itself powerless.
So no, Britain is not on the brink of bankruptcy. But that should be of little comfort. France’s predicament is a warning: if Reeves refuses to change course, Britain will learn – as Paris has now – that the medicine imposed by markets, or worse by the IMF, is far harsher than anything a Chancellor would ever dare prescribe.
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